Note 13: Income Taxes
From August 1, 2015, vTv Therapeutics Inc. has been subject to U.S. federal income taxes as well as state taxes. Prior to July 30, 2015, TTP and HPP were taxed as partnerships and all their income and deductions flowed through and were subject to tax at the partner level. The Company recorded an income tax provision of $0.8 million for the year ended December 31, 2017 representing foreign withholding taxes incurred in connection with the Huadong License Agreement. The Company did not record an income tax provision for the years ended December 31, 2016 and 2015.
As discussed in Note 1, the Company is party to a tax receivable agreement with a related party which provides for the payment by the Company to M&F (or certain of its transferees or other assignees) of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes (or, in some circumstances, the Company is deemed to realize) as a result of certain transactions. As no transactions have occurred which would trigger a liability under this agreement, the Company has not recognized any liability related to this agreement as of December 31, 2017.
On December 22, 2017, the US government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. Among other things, the TCJA (1) reduces the US statutory corporate income tax rate from 35% to 21% effective January 1, 2018, (2) eliminates the corporate alternative minimum tax, (3) eliminates the Section 199 deduction, and (4) changes rules related to uses and limitations of net operating loss carryforwards beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
The TCJA reduces the corporate tax rate to 21% effective January 1, 2018. We have recorded a provisional decrease in our deferred tax assets of $5.8 million with a corresponding adjustment to the valuation allowance for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the TCJA. The Company will continue to assess and refine, as necessary, its accounting for the TCJA as additional guidance and interpretation is provided.
A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows (in thousands):
|
|
December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. statutory tax benefit |
$ |
(18,846 |
) |
|
$ |
(19,374 |
) |
|
$ |
(14,387 |
) |
|
Partnership income (federal) not subject to tax to the Company |
|
13,475 |
|
|
|
13,651 |
|
|
|
12,502 |
|
|
Foreign withholding tax |
|
800 |
|
|
|
— |
|
|
|
— |
|
|
State taxes (net of federal benefit) |
|
55 |
|
|
|
— |
|
|
|
— |
|
|
Impact of the Tax Act |
|
5,847 |
|
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
(531 |
) |
|
|
5,723 |
|
|
|
1,885 |
|
|
Provision for income taxes |
$ |
800 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Effective income tax rate |
|
-1.5 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Significant components of our net deferred tax assets/(liabilities) are as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
$ |
9,023 |
|
|
$ |
8,189 |
|
|
Share-based compensation |
|
— |
|
|
|
3 |
|
|
Investment in partnerships |
|
470 |
|
|
|
1,844 |
|
|
Charitable contributions |
|
11 |
|
|
|
— |
|
|
Total deferred tax assets |
|
9,504 |
|
|
|
10,036 |
|
|
Valuation allowance |
|
(9,504 |
) |
|
|
(10,036 |
) |
|
Net deferred tax assets |
$ |
— |
|
|
$ |
— |
|
The Company assesses the available positive evidence and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing deferred tax assets. A significant piece of objective negative evidence evaluated was the Company’s recent operating losses. Such objective evidence limits the ability to consider other subjective evidence, such as forecasts of profitability. On the basis of this evaluation, the Company concluded that its deferred tax assets were not realizable on a more-likely-than-not basis and recorded a full valuation allowance. During the year ended December 31, 2017, the Company’s valuation allowance decreased by $0.5 million.
The Company has federal net operating loss carryforwards of $40.2 million that will be available to offset future taxable income. Such carryforwards expire in 2035 and 2037 if not utilized.
The Company applies applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2017, the Company had no uncertain tax positions. There are no uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of December 31, 2017.
The Company files U.S. federal, Connecticut, New York, North Carolina and Virginia tax returns. The only open tax years for U.S. federal and the aforementioned states are December 31, 2017, 2016 and 2015.